Financial Regulatory Reform What s in it For Community Banks? New Jersey Bankers Association 2017 Annual Conference, Palm Beach, Florida May 17-21, 2017 Eric Luse, Esq. John J. Gorman, Esq. Luse Gorman, PC 5335 Wisconsin Avenue, N.W., Suite 780 Washington, DC 20015 Phone: (202) 274-2000 Fax: (202) 362-2902 www.luselaw.com eluse@luselaw.com All Rights Reserved
Who We Are Luse Gorman is a Washington, D.C. based law firm that specializes in representing community banks and other financial institutions. We are a national leader in representing community banks in mergers and acquisitions, capital raising transactions, corporate governance, executive compensation, regulatory and enforcement and general corporate and securities law. We have acted as counsel on more bank and thrift mergers and acquisitions than any other law firm in the nation during the past 10 years. We represent over 250 financial institutions nationwide. Most are community banks ranging from $100 million to $25 billion in assets. (i)
Overview Regulatory relief for community banks will come in several possible ways, including: Financial Choice Act 2.0 or some legislative version of it. Very likely that CHOICE Act 2.0 will be significantly amended if it eventually becomes law. Other regulatory relief Legislation MHC Improvements Legislation CLEAR Relief Act of 2017 in the Senate Mutual Capital Certificates (HR 1595) (ii)
Financial CHOICE Act 2.0 Key Principles Reverse the continuing trend of Congress to cede legislative authority to the Executive branch through rulemaking End taxpayer bailouts of financial institutions and too big to fail Reduce and simplify financial regulation and require a cost/benefit analysis before implementing new rules Encourage banks to maintain higher capital levels in exchange for more limited regulation Revitalize economic growth through competitive, transparent and innovative capital markets End judicial deference granted to Federal agencies in court challenges to agency action (iii)
Financial CHOICE Act 2.0 Background Original CHOICE Act introduced in June 2016, but never advanced to full House of Representatives. On May 4, 2017 the bill was reported out of the House Financial Services Committee by a party-line vote of 34-26. Despite the political obstacles to passage in the Senate, the CHOICE Act is an important bill, especially those provisions that provide targeted relief to community banks since they are more likely to have bi-partisan support. Also possible that some parts of the bill could be passed through reconciliation, whereby certain budget-related legislation can be passed in the Senate by a simple majority vote. (iv)
SUMMARY
CHOICE Act 2.0 Key Provisions Ends too big to fail, including a complete repeal of Dodd-Frank s orderly liquidation authority; replaced with a new Subchapter V to Chapter 11 of the Bankruptcy Code. Reduces the burdens of stress testing on all financial institutions Most new rules by federal financial regulators would require a detailed quantitative and qualitative cost/benefit analysis Requires Congressional approval before major rules by financial regulators take effect Exempts Qualifying Banking Organizations that maintain a leverage ratio of at least 10% from a number of regulatory requirements S-1
CHOICE Act 2.0 Key Provisions Limits CFPB s enforcement authority (including UDAAP authority), makes CFPB subject to Congressional appropriations process, makes the director terminable at will by the President, and eliminates the supervisory authority of the CFPB (no more examinations of financial institutions). Volcker Rule is completely repealed Durbin Amendment setting price controls for interchange fees on debit card transactions is completely repealed Ends the deference courts must show Federal banking agencies under the Chevron doctrine S-2
CHOICE Act 2.0 Ending Too Big to Fail Dodd-Frank s orderly liquidation authority for large financial companies is repealed and replaced with a new Subchapter V to Chapter 11 of the Bankruptcy Code Repeals authority of the Financial Stability Oversight Council (FSOC) to designate nonbank firms as systemically important financial institutions (SIFIs) Repeals FSOC s ability to break up large financial institutions that pose a grave threat to the financial stability of the U.S. Limits FRB s ability to lend under the authority of Section 13(3) of the Federal Reserve Act, which currently permits broad-based lending programs for participants who are unable to secure credit from other banking institutions in unusual and exigent circumstances S-3
CHOICE Act 2.0 Ending Too Big to Fail Repeals Section 1105 of Dodd-Frank which currently permits FDIC to guarantee any obligations, including non-depository obligations, of solvent insured depository institutions or their holding companies Eliminates the systemic risk exception to the general requirement that the FDIC pursue the resolution method that is least costly Bars the Exchange Stabilization Fund of U.S. Treasury from being used to establish a guarantee program for any non-governmental entity Prevents FRB from using emergency authority to approve applications under Section 3(b)(1) of the BHCA unless the bank to be acquired is critically under-capitalized Living will framework for SIFIs is modified and made more transparent S-4
CHOICE Act 2.0 Stress Testing Comprehensive Capital Analysis and Review (CCAR) (stress tests) can t occur more often than every 2 years Company run Dodd-Frank stress tests (DFAST) would be conducted annually rather than semi-annually Requires FRB to use notice and comment process to implement new stress testing scenarios Retains $10 billion consolidated assets threshold for stress testing S-5
CHOICE Act 2.0 Regulatory Relief for QBOs A bank of any size that maintains a leverage ratio of at least 10% may elect to be regulated as a qualifying banking organization - QBO - and would be exempt from laws and regulations that: Address capital or liquidity requirements, including BASEL; Permit a federal banking agency to object to a capital distribution to shareholders; Implement the enhanced prudential standards (EPS) of Section 165 of Dodd-Frank, including mandatory supervisory and company-run stress tests, risk committees, contingent capital, resolution plans, short-term debt limit and leverage limit requirements; S-6
CHOICE Act 2.0 Regulatory Relief for QBOs Permit federal banking agencies to consider systemic risk when considering an application to consummate a transaction or begin a new activity Permit federal banking agencies to block or limit mergers, consolidations or acquisitions of assets or control to the extent they relate to capital or liquidity standards or concentrations of deposits or assets (but the acquirer must maintain a 10% leverage ratio); QBOs would also be considered well capitalized for purposes of Prompt Corrective Action rules, restrictions on brokered deposits, restrictions on interstate branching and merger transactions, and other laws and regulations S-7
CHOICE Act 2.0 Restructuring the CFPB General Authority and Oversight Consumer Financial Protection Bureau (CFPB) renamed the Consumer Law Enforcement Agency (CLEA) and restructured outside the FRB and subject to Congressional appropriation process Single director terminable at will by the President Terminates the Bureau s ability to examine and supervise regulated entities, and eliminates Bureau s authority over small-dollar lenders Prohibits publication of consumer complaints, and consumer complaint database is abolished S-8
CHOICE Act 2.0 Restructuring the CFPB General Authority and Oversight New and proposed rules (and enforcement) would be subject to cost-benefit analysis and additional review by Office of Economics, newly established within the CLEA, for impact on consumer prices, choice and access. Office also required to review existing rules. CLEA would be required to consider safety and soundness issues when promulgating new rules. Repeals CFPB s 2013 indirect auto lending guidance Repeals CFPBs authority to restrict arbitration S-9
CHOICE Act 2.0 Restructuring the CFPB Enforcement Eliminates CFPB s UDAAP authority completely authority only to enforce enumerated consumer protection laws The federal banking agencies would be authorized to prescribe rules to prevent unfair or deceptive practices by depository institutions Allows defendants to compel CFPB to bring enforcement actions in federal court rather than through its administrative forum S-10
CHOICE Act 2.0 More Stringent Standards for Rulemaking Requires FRB, OCC, FDIC, CFPB, NCUA, SEC, CFTC and Federal Housing Finance Agency (FHFA) to conduct and publish quantitative and qualitative cost-benefit analyses when adopting rules. If the costs of the rule exceed the benefits, the regulators are prohibited from finalizing the rules absent an express authorization from Congress Congress would be permitted to prevent a non-major rule from becoming effective by passing a joint resolution of disapproval. Each major rule of a federal financial agency must be approved by a joint resolution of Congress within 70 legislative days of its submission to Congress in order to take effect. Would not be subject to filibuster in the Senate, and would proceed to a floor vote of each House of Congress automatically S-11
CHOICE Act 2.0 Other Regulatory Relief Volcker Rule. Repeals Section 619 of Dodd-Frank, known as the Volcker Rule, which prohibits banking organizations from engaging in proprietary trading or forming certain relationships with a hedge fund or private equity fund Durbin Amendment. Repeals Durbin Amendment, which sets price controls for interchange fees on debit card transactions Chevron Standard. Eliminates so-called Chevron and Auer deference for judicial review of action by a federal financial agency under the Administrative Procedure Act. Effective 2 years after enactment. S-12
CHOICE Act 2.0 Other Regulatory Relief FDIC Board. Restructures FDIC s five member board so that Comptroller of the Currency and Director of the CFPB would no longer be members, and FDIC board would consist of FDIC-only members. Bank Regulatory Agencies Subject to Appropriations Process. Makes OCC, FDIC, FHFA, NCUA and non-monetary functions of the FRB subject to regular Congressional appropriations process Settlements to Third Parties. Forbids the federal financial agencies and the Justice Department from agreeing to pay any settlement that provides for payments to any person who is not a victim of the alleged wrongdoing S-13
CHOICE Act 2.0 Other Regulatory Relief Small Bank Holding Company Exemption. Raises the consolidated assets threshold for applicability of the FRB s Small Bank Holding Company Policy Statement from $1.0 billion to $10.0 billion Tailored Regulations. Requires financial regulators to properly tailor regulations based on business models and risk profiles of the institutions subject to the regulations in order to limit regulatory impact, costs, liability risk and other burdens Risk-Retention/Mortgage-Backed Securities. Eliminates riskretention requirements for asset-backed securities other than residential mortgages S-14
CHOICE Act 2.0 Other Regulatory Relief Election to be Regulated as a National Bank. Permits any federal savings association (mutual or stock) to elect to receive the same powers as, and be subject to the same obligations of, a national bank. Would be relieved of compliance with the Qualified Thrift Lender Test. Exam Reports. Requires a 60-day turnaround for final reports following examinations. Streamlined Call Reports. Requires federal banking agencies to streamline Call Reports for first and third quarters for highly rated and well-capitalized insured depository institutions S-15
CHOICE Act 2.0 Mortgage Lending Relief Safe Harbor From Ability to Repay. Provides a safe-harbor from ability to repay requirements for a mortgage loan held on the balance sheet of a depository institution since its origination, provided the loan satisfies the restrictions on prepayment penalties for a qualified mortgage. TILA, RESPA and HMDA Exemptions. Includes exemptions from: (1) escrow requirements under the Truth in Lending Act (TILA) for loans held by a creditor with $10 billion or less in consolidated assets for at least 3 years after origination; (2) requirements under Section 6 of RESPA for a servicer that serves 20,000 or fewer mortgage loans; and (3) recordkeeping and disclosure requirements under HMDA for a depository institution that originates less than 100 closed-ended mortgage loans in each of previous 2 calendar years; S-16
CHOICE Act 2.0: SEC & Corporate Governance/Compliance Prohibits universal proxy ballots in proxy contests. Modernizes Shareholder Proposal Thresholds increases share ownership thresholds for submitting shareholder proposals from ownership of 1% of outstanding shares or $2,000 for one year, to 1% of outstanding shares for three years; increases resubmission thresholds (6%-15%-30%); and prohibits proposals by a proxy other than the shareholders. Proxy Advisory Firms requires proxy advisory firms to register with the SEC and to provide companies with an opportunity to review and provide meaningful comment on draft recommendations CEO Pay Ratio Disclosure Repeals requirement that publicly traded companies disclose the ratio of median employee vs. CEO pay S-17
CHOICE Act 2.0: SEC & Corporate Governance/Compliance Incentive-Based Compensation Repeals Section 965 of Dodd-Frank which requires federal agencies to jointly issue regulations with respect to incentivebased compensation at financial institutions with >$1.0 billion assets. Increased Penalties Increases maximum civil penalties and criminal sanctions for violations of federal securities laws and regulations ALJ Proceedings Gives defendants in SEC enforcement actions brought before an administrative law judge the right to remove action to federal court JOBS Act Extends to all issuers the JOBS Act provisions for testing the waters and confidential submission of IPO registration statement Fiduciary Rule Repeals Department of Labors Fiduciary Rule Increases 404(b) Exemptions Increases the exemption from complying with an outside auditor s attestation of a Company s internal financial controls to issuers with a market capitalization of up to $500 million S-18
Other Legislation Mutual Capital Certificates HR 1595 ( Mutual Bank Capital Opportunity Act of 2017 ) would allow mutual depository institutions to issue mutual capital certificates that qualify as Tier 1 capital for purposes of any capital requirements mandated by Federal law or regulation. Requires federal banking agencies to issue regulations implementing mutual capital certificate authority. A mutual capital certificate: (1) is subordinate to all claims of the institution; (2) is unsecured by assets of the institution; (3) does not permit preemptive rights; (4) does not provide voting or membership rights; (5) is not eligible for use as collateral for any loan; (6) entitles the holder to dividends if declared by the institution; and (7) is not redeemable until 5 years after issuance except in the case of a merger, conversion, MHC reorganization or consolidation of such institution. S-19
Other Legislation MHCs Allows federal mutual holding companies (MHCs) to be formed through mergers (as opposed to a purchase and assumption transaction) or any other manner permitted by federal regulators Specifically allows MHCs to acquire commercial banks, savings banks and their holding companies Allows all federal MHCs to waive the receipt of dividends from their savings association or mid-tier holding company subsidiaries without: a vote of members dilution of ownership of minority stockholders impact on the valuation of the MHC interest or exchange ratio in the event the MHC converts to stock form S-20
Full Presentation
CHOICE Act 2.0 Ending Too Big to Fail Limiting FSOC Authority Title I repeals authority of the Financial Stability Oversight Council (FSOC) to designate nonbank firms as systemically important financial institutions (SIFIs) and therefore subject them to enhanced regulatory oversight. Repeals FSOC s existing SIFI designations retroactively. FSOC is a 15 member committee created by Dodd-Frank Act that is authorized to designate nonbank institutions as SIFIs if they could pose a threat to the financial stability of the U.S. Also, repeals FSOC s ability to break up large financial institutions that pose a grave threat to the financial stability of the U.S. Does not abolish FSOC continues to have authority to monitor market developments; facilitate information sharing among agencies; must report to Congress on these risks and make recommendations. 1
CHOICE Act 2.0 Ending Too Big to Fail Repeal and Replace OLA Title II of CHOICE Act repeals the orderly liquidation authority (OLA) of Dodd-Frank OLA Permits federal authorities to put large financial companies into FDIC receivership if their failure would present a threat to U.S. financial stability CHOICE Act replaces OLA with a new Subchapter V to Chapter 11 of U.S. Bankruptcy Code for large financial companies (Incorporates the Financial Institutions Bankruptcy Act (HR 1667) which has passed the House) 2
CHOICE Act 2.0 Ending Too Big to Fail Repeal and Replace OLA Entities eligible for Subchapter V include: a bank holding company of any size any other holding company with consolidated assets of $50 billion or more where at least 85% of the consolidated assets or gross revenues of the company are financial in nature Filing for bankruptcy is solely the decision of the debtor company no involuntary bankruptcy No source of government liquidity, such as the Orderly Liquidation Fund, available to a bank holding company that files for bankruptcy under this new subchapter 3
CHOICE Act 2.0 Ending Too Big to Fail Resolution Planning Living Wills Section 165 of Dodd-Frank requires BHCs with $50 billion or more in assets and nonbank SIFIs to submit resolution plans ( living wills ) to FRB and FDIC annually demonstrating they can be resolved in an orderly manner under the Bankruptcy Code. Severe consequences for deficient living wills more stringent capital and/or liquidity requirements, restrictions on growth, activities and operations, and divestiture of identified assets and operations 4
CHOICE Act 2.0 Ending Too Big to Fail Resolution Planning CHOICE Act makes several changes to resolution planning process Removes FDIC from Section 165 resolution planning process Limits frequency of Section 165 resolution plan submissions to 2 year cycles Requires FRB to publicly disclose the framework it uses to review resolution plans and subjects the framework to a notice and comment process Requires FRB to provide feedback on resolution plans within 6 months of submission Requires any other Federal banking agency that requires the submission of resolution plans to adhere to the limits imposed on the FRB for Section 165 plans (Effectively extends CHOICE Act relief for Section 165 living wills to the plans the FDIC requires insured depository institutions to submit (IDI Plans)) 5
CHOICE Act 2.0 Ending Too Big to Fail Emergency Programs CHOICE Act would: Limit FRB s ability to lend under the authority of Section 13(3) of the Federal Reserve Act, which currently permits broad-based lending programs for participants who are unable to secure credit from other banking institutions in unusual and exigent circumstances, on a vote of at least 5 members of the FRB and prior approval of the Secretary of Treasury Authorize the FRB to establish such a program only under unusual and exigent circumstances that pose a threat to the financial stability of the U.S. and only if the presidents of 9 Reserve Banks vote in favor (along with 5 members of the FRB and Secretary of Treasury) 6
CHOICE Act 2.0 Ending Too Big to Fail Emergency Programs Repeals Section 1105 of Dodd-Frank which currently permits FDIC to guarantee any obligations, including non-depository obligations, of solvent insured depository institutions or their holding companies if FDIC and FRB jointly determine a liquidity event exists that would have serious adverse effects on financial stability or economic conditions, and Congress passes a resolution of approval. Eliminates the systemic risk exception to the general requirement that the FDIC pursue the resolution method that is least costly to the insurance fund (so-called least-cost resolution requirement). 7
CHOICE Act 2.0 Ending Too Big to Fail Emergency Programs Bars the Exchange Stabilization Fund of U.S. Treasury from being used to establish a guarantee program for any non-governmental entity Prevents FRB from using emergency authority to approve applications under Section 3(b)(1) of the BHCA unless the bank to be acquired is critically under-capitalized for purposes of Prompt Corrective Action regulations 8
CHOICE Act 2.0 Ending Too Big to Fail Emergency Programs Emergency actions that the Federal agencies took during the 2008-2009 financial crisis were considered critical to restoring market confidence. Dodd-Frank limited a number of the authorities that were exercised by the FRB, Treasury and FDIC, and CHOICE Act further impairs the ability of federal agencies to respond to a financial crisis with programs similar to ones used to respond to the 2008-2009 crisis absent emergency legislation that grants them new authorities. Intent of CHOICE Act s limitations is to reduce the moral hazard associated with the availability of emergency programs and strengthen market discipline. 9
CHOICE Act 2.0 Stress Testing Comprehensive Capital Analysis and Review (CCAR) (stress tests) can t occur more often than every 2 years Company run Dodd-Frank stress tests (DFAST) would be conducted annually rather than semi-annually Eliminates DFAST requirements for financial companies other than bank holding companies Requires FRB to use the notice and comment process to implement new stress testing scenarios Codifies the GAO s 2016 recommendations for improving the stress testing process, including increasing transparency of stress test methodology and data, and providing for more communication between CCAR banking organizations and the FRB 10
CHOICE Act 2.0 Stress Testing FRB must issue a regulation for company-run stress tests Extends to all banking organizations the relief from the qualitative portions of CCAR that the FRB recently extended to certain large bank holding companies As a result, FRB would no longer be permitted to object to a banking organization s capital plan in the CCAR assessment based on qualitative deficiencies Retains $10.0 billion consolidated assets threshold for stress testing 11
CHOICE Act 2.0 Regulatory Relief for QBOs Provides that banking organizations that attain and maintain a leverage ratio of at least 10% may elect to be exempt from a number of regulatory requirements, including BASEL III capital and liquidity standards and the heightened prudential standards applicable to larger financial institutions under Section 165 of Dodd-Frank 12
CHOICE Act 2.0 Regulatory Relief for QBOs A bank of any size that makes this election (a qualifying banking organization or QBO ) would be exempt from laws and regulations that: Address capital or liquidity requirements, including BASEL; Permit a federal banking agency to object to a capital distribution to shareholders; Implement the enhanced prudential standards (EPS) of Section 165 of Dodd-Frank, including mandatory supervisory and company-run stress tests, risk committees, contingent capital, resolution plans, short-term debt limit and leverage limit requirements; 13
CHOICE Act 2.0 Regulatory Relief for QBOs Permit federal banking agencies to consider systemic risk when considering an application to consummate a transaction or begin a new activity Permit federal banking agencies to block or limit mergers, consolidations or acquisitions of assets or control to the extent they relate to capital or liquidity standards or concentrations of deposits or assets (but the acquirer must maintain a 10% leverage ratio); QBOs would also be considered well capitalized for purposes of Prompt Corrective Action rules, restrictions on brokered deposits, restrictions on interstate branching and merger transactions, and other laws and regulations 14
CHOICE Act 2.0 Regulatory Relief for QBOs Calculation of QBO leverage ratio--traditional and non-traditional banks CHOICE Act divides industry into 2 groups with respect to how leverage ratio is calculated: traditional banks and non-traditional banks Traditional banks are banks that: (1) have zero trading assets and liabilities; (2) do not engage in swaps or securities-based swaps (other than interest rate or foreign exchange); and (3) have a total notional exposure of swaps and securities-based swaps of $8 billion or less. Traditional banks may opt for relief if they have at least a 10% GAAP based leverage ratio Non-traditional banks are all other banks that aren t traditional banks Non-traditional banks can opt for regulatory relief if they have at least a 10% supplemental leverage ratio. Supplemental leverage ratio is more complicated to calculate and monitor. 15
CHOICE Act 2.0 Restructuring the CFPB General Authority and Oversight Consumer Financial Protection Bureau (CFPB) renamed the Consumer Law Enforcement Agency (CLEA) and restructured outside the FRB Single director terminable at will by the President Funding subject to Congressional appropriation process A dual mandate imposed on CLEA to: (1) increase competition and enhance consumer choice; and (2)implement and enforce consumer laws consistently for the purpose of strengthening participation in the markets without government interference 16
CHOICE Act 2.0 Restructuring the CFPB General Authority and Oversight Terminates the Bureau s ability to examine and supervise regulated entities, and eliminates Bureau s authority over small-dollar lenders; New and proposed rules (and enforcement) would be subject to cost-benefit analysis and additional review by Office of Economics, newly established within the CLEA, for impact on consumer prices, choice and access. Office also required to review existing rules. CLEA would be required to consider safety and soundness issues when promulgating new rules. Repeals CFPB s 2013 indirect auto lending guidance 17
CHOICE Act 2.0 Restructuring the CFPB General Authority and Oversight CFPB s authority to obtain information from regulated entities would be narrowed, e.g. restricting access to exam reports and requiring consumer consent for access to nonpublic personal information Prohibits publication of consumer complaints, and consumer complaint database is abolished Repeals CFPBs authority to restrict arbitration Requires Chair of CLEA to issue safe harbor advisory opinions on request to respond to inquiries concerning specific proposed or prospective conduct 18
CHOICE Act 2.0 Restructuring the CFPB Enforcement Abusive eliminated from scope of authority to police unfair, deceptive, or abusive acts and practices (UDAAP), aligning to pre-dodd-frank scope of FTC Act authority Curtail the CFPB s enforcement authority over depository institutions by removing its authority to bring enforcement actions for unfair or deceptive acts and practices Eliminates CFPB s authority to prescribe rules to deem acts or practices unfair or deceptive authority only to enforce enumerated consumer protection laws Allows defendants to compel CFPB to bring enforcement actions in federal court rather than through its administrative forum 19
CHOICE Act 2.0 More Stringent Standards for Rulemaking Cost Benefit Analysis CHOICE Act requires FRB, OCC, FDIC, CFPB, NCUA, SEC, CFTC and Federal Housing Finance Agency (FHFA) (collectively, the Federal Financial Agencies ) to conduct and publish quantitative and qualitative cost-benefit analyses when adopting rules. If the costs of the rule exceed the benefits, the regulators are prohibited from finalizing the rules absent an express authorization from Congress. Currently most regulators simply need to state the economic impact of a proposed rule, without any cost-benefit analysis and without supporting data. 20
CHOICE Act 2.0 More Stringent Standards for Rulemaking Cost Benefit Analysis Proposed rules would also need to be accompanied by: a discussion of why private markets or state or local authorities can t adequately address the problem that necessitates the rule; identification of alternatives to the rule, and justifications for why the rule would be more effective than the alternatives; and release underlying data, methodology and assumptions underlying the rule so that the agencies results can be substantially reproduced. Rulemaking would have a 90-day comment period (unless agency explains why it can t) and data and analysis provided by commenters involved has to be incorporated in the final rule or explained why it is not incorporated. 21
CHOICE Act 2.0 More Stringent Standards for Rulemaking Cost Benefit Analysis Each Federal Financial Agency would be required to conduct a retrospective review of its rules at least once every 5 years, and develop a plan to make the agency s regulatory program more effective and less burdensome. Congress would be permitted to prevent a non-major rule from becoming effective by passing a joint resolution of disapproval. Any person aggrieved by a final rule would be permitted to challenge the rule in the Court of Appeals for the D.C. Circuit within one year of the rule s publication in the Federal Register. 22
CHOICE Act 2.0 More Stringent Standards for Rulemaking Major Rules Each major rule of a federal financial agency must be approved by a joint resolution of Congress within 70 legislative days of its submission to Congress in order to take effect. The joint resolution would not be subject to filibuster in the Senate, and would proceed to a floor vote of each House of Congress automatically. The President can cause a rule to take effect (without Congressional approval) for a single 90-day period if the President determines by executive order that the rule would be necessary because of an imminent threat to health, safety or other emergency, necessary for national security or enforcement of criminal laws, or was issued pursuant to a statute implementing an international trade agreement. 23
CHOICE Act 2.0 More Stringent Standards for Rulemaking Major Rules CHOICE Act adopts the definition of a major rule contained in the Congressional Review Act, meaning any rule that OIRA (Office of Information and Regulatory Affairs) finds has resulted in or is likely to result in: (a) an annual effect on the economy of $100 million or more; (b) a major increase in costs or prices for consumers, individual industries, federal, state or local government agencies; or (c) significant adverse effects on competition, employment, investment, productivity, innovation or the ability of U.S.-based enterprises to compete with foreign-based enterprises. This determination is made by OIRA, which is within OMB. 24
CHOICE Act 2.0 Judicial Review of Agency Action Eliminates so-called Chevron and Auer deference for judicial review of action by a federal financial agency under the Administrative Procedure Act. Effective 2 years after enactment. Under the Chevron doctrine, if there is ambiguity in how to interpret a statute, courts must accept an agency s interpretation of law unless it is arbitrary or manifestly contrary to the statute. Dodd-Frank went further than Chevron by directing courts to grant heightened deference to the CFPB. Under the CHOICE Act, in reviewing any challenge to an action by a federal financial agency under the Administrative Procedure Act, a court would decide all relevant questions of law, including the interpretation of any statute or any rule made by an agency, without deference to the agency. 25
CHOICE Act 2.0 Agency Restructuring Restructures FDIC s five member board so that Comptroller of the Currency and Director of the CFPB would no longer be members, and FDIC board would consist of FDIC-only members. 26
CHOICE Act 2.0 Appropriations Makes OCC, FDIC, FHFA, NCUA and non-monetary functions of the FRB subject to regular Congressional appropriations process Currently OCC and FHFA generate income primarily from fees on regulated entities, while NCUA and FDIC generate income primarily from deposit insurance premiums, all of which are exempt from appropriations process. FRB is unique in that it derives income primarily from the securities it purchases in the conduct of monetary policy. Also earns income from interest on loans and charges for market services it offers, such as transaction clearing. Subjecting these revenue raising activities to the annual appropriations process (as is the case with SEC and CFTC) would provide Congress with the opportunity to influence budget, size, priorities and activities of any agency. 27
CHOICE Act 2.0 Enforcement Reform Requires the federal financial agencies to adopt policies and procedures to establish a lead agency for any particular enforcement investigation or action, in order to avoid duplication of efforts and unnecessary burdens and ensure consistent enforcement and minimize duplication of efforts with other federal or state authorities when bringing enforcement actions Intended to reduce likelihood that agencies will pile on a banking organization with multiple enforcement actions and penalties for a single violation or pattern of violations Would also forbid the federal financial agencies and the Justice Department from agreeing to pay any settlement that provides for payments to any person who is not a victim of the alleged wrongdoing 28
CHOICE Act 2.0: SEC & Corporate Governance/Compliance Prohibits Universal Proxy Ballots Currently, companies are not required to use a universal proxy ballot in the event of a proxy contest, so shareholders receive one ballot listing candidates nominated by the board of directors and separate ballot(s) listing candidates nominated by the shareholder proponents. The CHOICE Act would prohibit the SEC from requiring companies to use a universal proxy ballot. Modernizes Shareholder Proposal Thresholds CHOICE Act would increase share ownership thresholds for submitting shareholder proposals from ownership of 1% of outstanding shares or $2,000 for one year, to 1% of outstanding shares for three years; increases resubmission thresholds (6%-15%-30%); and prohibit proposals by a proxy other than the shareholders. 29
CHOICE Act 2.0: SEC & Corporate Governance/Compliance Amend Frequency of Say-on-Pay Votes Under the Dodd-Frank Act, non-binding shareholder votes approving executive compensation must occur at least once every three years for publicly traded companies. CHOICE Act would amend the frequency to each year in which there has been a material change to executive compensation. Proxy Advisory Firms CHOICE Act requires proxy advisory firms to register with the SEC and to provide companies with an opportunity to review and provide meaningful comment on draft recommendations. The registration application would include a certification that the firm has the financial and managerial resources to consistently provide proxy advice based on accurate information. The firm would be required to disclose the procedures and methodologies used in developing proxy voting recommendations, its organizational structure, whether or not it has a code of ethics, any potential or actual conflict of interest, and its policies and procedures to manage conflicts of interest. The registration would be updated if there are material changes, and at least on an annual basis. 30
CHOICE Act 2.0: SEC & Corporate Governance/Compliance CEO Pay Ratio Disclosure Repeals requirement that publicly traded companies disclose the ratio of median employee vs. CEO pay Repeal Disclosure of Hedging Policies Repeals the Dodd-Frank requirement that companies disclose whether employees or directors may engage in hedging transactions in the company s equity securities. Repeal Incentive-Based Compensation Rules Repeals Section 965 of Dodd- Frank which requires federal agencies to jointly issue regulations with respect to incentive-based compensation at financial institutions with $1.0 billion or more in assets. Retains interagency guidance that compensation must be consistent with safety and soundness. Increased Penalties Increases maximum civil penalties and criminal sanctions for violations of federal securities laws and regulations. 31
CHOICE Act 2.0: SEC & Corporate Governance/Compliance Limit Clawbacks Under the Dodd-Frank Act, companies that haven t developed and implemented compensation clawback policies cannot be listed on national securities exchanges and associations. CHOICE Act would limit the scope of the clawback rule to current and former executives who had control or authority over the financial reporting that resulted in the accounting restatement. Pay vs. Performance Disclosures The future of the pay versus performance provision is uncertain because it isn t addressed by the CHOICE Act. Section 953(a) of Dodd-Frank requires companies to disclose the relationship between executive compensation actually paid and the financial performance of the company. ALJ Proceedings Gives defendants in SEC enforcement actions brought before an administrative law judge the right to remove action to federal court. 32
CHOICE Act 2.0 SEC & Capital Markets Improvements Regulation A+ Increases the threshold for Regulation A+ offerings from $50.0 million to $75.0 million, with a required increase for inflation JOBS Act Title 1 Extends to all issuers the JOBS Act provisions for testing the waters and confidential submission of a registration statement before an initial public offering Fiduciary Rule Repeals Department of Labors Fiduciary Rule SEC Prohibitions Prohibits the SEC from promulgating a rule on standards of conduct from brokers and dealers before it provides reports to House Financial Services Committee and Senate Banking Committee describing whether retail investors are being harmed. Increases 404(b) Exemptions Increases the exemption from complying with an outside auditor s attestation of a Company s internal financial controls required by Section 404(b) of Sarbanes-Oxley to issuers with a market capitalization of up to $500 million and to depository institutions with less than $1.0 billion in assets. 33
CHOICE Act 2.0 Repeal of Volcker Rule Repeals Section 619 of Dodd-Frank, known as the Volcker Rule, which prohibits banking organizations form engaging in proprietary trading or forming certain relationships with a hedge fund or private equity fund 34
CHOICE Act 2.0 Miscellaneous Regulatory Relief Raises the consolidated asset threshold for applicability of the FRB s Small Bank Holding Company Policy Statement from $1.0 billion to $10.0 billion Section 546 would require financial regulators to properly tailor regulations based on an institution s business model and risk profile to limit regulatory impact, costs, liability risk and other burdens Eliminates risk-retention requirements for asset-backed securities other than residential mortgages 35
CHOICE Act 2.0 Miscellaneous Regulatory Relief Permits any federal savings association to elect to receive the same powers as, and be subject to the same obligations of, a national bank. Would be relieved of compliance with the Qualified Thrift Lender Test. Section 536 requires a 60-day turnaround for final reports following examinations and provides clarity and consistency regarding how regulatory agencies and examiners treat commercial loans regarding nonaccural, appraisal, classification and capital issues. 36
CHOICE Act 2.0 Miscellaneous Regulatory Relief Section 536 establishes within the FSOC an Office of Independent Examination Review that would: receive and investigate complaints from financial institutions regarding examinations; adjudicate supervisory appeals; and ensure consistency of examination procedures Requires federal banking agencies to streamline Call Reports for first and third quarters for highly rated and wellcapitalized insured depository institutions 37
CHOICE Act 2.0 FRB Oversight Reform In an effort to increase transparency and accountability regarding FRB monetary policymaking, the CHOICE Act would: Require the FRB to adopt strict formulas to set target interest rates in the course of monetary policymaking; Change the composition of the FOMC so that the President of the Federal Reserve Bank of NY does not have a permanent seat, and a designee of each Reserve Bank serves on the FOMC every other year; Provide for an annual audit of the FRB and the Reserve Banks by the Comptroller General; 38
CHOICE Act 2.0 FRB Oversight Reform Creates a Centennial Monetary Commission comprised mostly of members of Congress to study and report on various aspects of monetary policy, including the FRB s dual mandate of achieving maximum employment and stable prices on U.S. economic activity, FRB actions and Federal debt; Requires the FOMC to record all of its meetings and publicly release full meeting transcripts. 39
CHOICE Act 2.0 Mortgage Lending Relief Provides a safe-harbor from ability to repay requirements for a mortgage loan held on the balance sheet of a depository institution since its origination, provided the loan satisfies the restrictions on prepayment penalties for a qualified mortgage. Includes exemptions from: (1) escrow requirements under the Truth in Lending Act (TILA) for loans held by a creditor with $10 billion or less in consolidated assets for at least 3 years after origination; (2) requirements under Section 6 of RESPA for a servicer that serves 20,000 or fewer mortgage loans; and (3) recordkeeping and disclosure requirements under HMDA for a depository institution that originates less than 100 closed-ended mortgage loans in each of previous 2 calendar years; 40
CHOICE Act 2.0 Mortgage Lending Relief Amends the S.A.F.E. Mortgage Licensing Act of 2008 to ease the transition of loan originators from one employer to another employer covered by a different licensing scheme; Broadens definitive mortgage originator in TILA for retailers of manufactured or modular homes; Raises the threshold for a mortgage secured by a mobile home or houseboat to be considered a high-cost mortgage under TILA 41
CHOICE Act 2.0 Repeal of Durbin Amendment Durbin Amendment to Dodd-Frank establishes price controls for interchange fees on debit card transactions CHOICE Act completely repeals the Durbin Amendment Reasons for repeal: Congress and federal agencies should not be determining the contractual amounts private parties can pay for services Banks have tried to recoup lost interchange fee revenue by charging higher fees on deposit accounts (fewer banks are offering free checking, for example) Price caps have distorted entire banking market. An ICBA survey noted that since Durbin, 61% of community banks said they would start to impose fees for all checking customers and 93% said they would charge customers for services they now provide for free 42
Other Regulatory Relief Legislation Mutual Capital Certificates HR 1595 ( Mutual Bank Capital Opportunity Act of 2017 ) would allow mutual depository institutions to issue mutual capital certificates that qualify as Tier 1 capital for purposes of any capital requirements mandated by Federal law or regulation. Requires federal banking agencies to issue regulations implementing mutual capital certificate authority. A mutual capital certificate: (1) is subordinate to all claims of the institution; (2) is unsecured by assets of the institution; (3) does not permit preemptive rights; (4) does not provide voting or membership rights; (5) is not eligible for use as collateral for any loan; (6) entitles the holder to dividends if declared by the institution; and (7) is not redeemable until 5 years after issuance except in the case of a merger, conversion, MHC reorganization or consolidation of such institution. 43
Other Regulatory Relief Legislation Mutual Holding Company Improvements Allows federal mutual holding companies (MHCs) to be formed through mergers (as opposed to a purchase and assumption transaction) or any other manner permitted by federal regulators Specifically allows MHCs to acquire commercial banks, savings banks and their holding companies Allows all federal MHCs to waive the receipt of dividends from their savings association or mid-tier holding company subsidiaries without: a vote of members dilution of ownership of minority stockholders impact on the valuation of the MHC interest or exchange ratio in the event the MHC converts to stock form 44
LUSE GORMAN, PC ATTORNEYS AT LAW 5335 Wisconsin Avenue, NW Washington, DC 20015 TELEPHONE (202) 274-2000 FACSIMILE (202) 362-2902 www.luselaw.com 45